CIO Speak: INR/USD depreciation - Beyond the obvious!

The stock markets, which had already commenced into short-term correction mode in December 2024, continued to weaken in the new year. Compounding this, the Indian Rupee woke up from a 2-year slumber and embarked on a steady depreciation against the US Dollar, depreciating ~4% since October 2024 and ~1.5% since the beginning of this year, to touch a new low of nearly INR 88. Further, February started with the Union Budget 2025 which signaled a clear shift from capex to consumption and savings.

Rounding this off, the Reserve Bank of India (RBI) reduced benchmark interest rates by 25 basis points to 6.5% - the first cut after a prolonged period of 5 years – and asserted that this move is aligned with the government’s focus on boosting consumption. As if this was not enough, the new tax bill has also been tabled. With such a flurry of activity, it is important to understand which shifts are transitory in nature and which ones will have a long-term structural impact on the Indian economy and the Indian markets.

Highlights

• The Indian Rupee has depreciated by approximately 4% since October 2024 and around 1.5% since the beginning of 2025, reaching a new low of nearly INR 88 per USD.
• The Union Budget 2025 signaled a shift from capital expenditure (capex) to consumption and savings. Additionally, the Reserve Bank of India (RBI) cut benchmark interest rates by 25 basis points to 6.5%, the first reduction in five years, to boost consumption.
• The INR's depreciation has been influenced by weaker foreign investment flows and significant selling by Foreign Portfolio Investors (FPIs). The historical trend suggests an average annual INR depreciation of ~4%.
• Despite the depreciation, the long-term structural growth story of India remains intact. With India's focus on attracting foreign investment and boosting consumption, the INR is expected to stabilize and align with its historical depreciation trend rather than undergoing uncontrolled depreciation.